Abstract: Virtual banking is broadly defined in this paper as the provision of banking services via means

other than that of traditional physical branches. Currently, virtual banking exists in the forms of ATM,
phone

banking, home banking and Internet banking. Understanding people’s adoption intention of virtual
banking can

help financial institutions formulate appropriate marketing strategies for new forms of banking. This
paper

examines the current trends in the Internet revolution that have set in motion in the Chinese banking
sector, and

reports on an empirical research carried out in China to study the customers’ preference for virtual
banking and

the factors which they consider influence the adoption of virtual banking.

Key words: information technology virtual banking commercial bank

1. Introduction

Commercial bank is undergoing a rapid change as the international economy expands and advances
towards

institutional and market competence. A major force behind these developments is information
technology. Using IT, a

bank can reach out to customers and provide them with not only general information about its services
but also the

opportunity of performing interactive retail banking transactions. In China, commercial banks have
quickly realized

the importance of this factor to competitive advantage. Since 1990s, they have continuously innovated
through

technology-enhanced products and services, such as multifunctional automatic teller machine (ATM),
electronic share

application, telephone banking, TV banking, electronic transfers, electronic cash cards and Internet-
based E-banking.

A virtual bank then can be defined as a “non-branch bank”, while the virtual bank is the provider of
banking

services through electronic media such as ATM, telephone, personal computers and/or Internet. The
purpose of this

research is to investigate how different virtual banking forms are adopted or perceived in China. The
findings of this
research may help both the bank managers formulate their marketing strategies to promote virtual
banking and the

researchers do well in virtual banking studies and virtual organizations in general.

In the next section, we review the relevant literature in the area. Background information on Chinese
banking

sector is then presented. The following section describes the research methodology, which is then
followed by the

results from the survey. The paper concludes with a summary, outlining the implications of the findings
and the

limitations of this study.

2. IT and Commercial Banking

2.1 IT Impact on Banking

Zheng Li, Ph.D. candidate of School of Economics and Finance, Xi’an Jiaotong University; Main research
field: Financial

Engineering; Address: Mailbox No.1815, Xi’an Jiaotong University, No.28 Xianning Road, Xi’an, Shaanxi,
China, Postcode: 710049;

Tel: 029-82675014, 13649278285; E-mail: liszer_1973@sina.com.

**

Yonghong Zhong, Ph.D. of Xi’an Jiaotong University, now working for South China University of
Technology; Main research field:

Operation and Development of Commercial Banks; Tel: 020-39385408; E-mail:

kitty_1977@sina.com.The Adoption of Virtual Banking in China: An Empirical Study

76

Information Technology (IT) plays a major role in the success of a commercial bank in the highly
competitive

industry. It influences other successful factors and competitive strategies cannot be practically
implemented without

its support. Commercial banks are highly information intensive. Their business is heavily dependent on
information

related to the fund market including suppliers, users and brokers. IT’s extension has made the banking
industry enter
a new era, where an explosion of IT applications has been seen throughout banking services, and the
division

between front and back-offices has become less relevant as integrated systems increasingly blur the
line. Although

the IT implementation by the banks was previously directed internally, it has facilitated the introduction
of changes

in banking, the full effects of which are still being felt. New banking delivery channels have made
banking services

convenient to customers, and bank customers may now perform their banking transactions at the place
and time of

their choice. In addition, banks benefit from low operating cost through fewer staff and physical
branches.

2.2 Literature Review

While numerous studies have been undertaken to examine issues in the wider context of virtual banking
and

customer loyalty, comprehensive research in the area of virtual-banking issues and customer
preferences in the

specific context of China has been rather limited. The study examined the evolution of virtual-banking in
China and

analyzed the various electronic delivery channels such as automatics teller machine (ATM), telephone-
banking and

PC-banking, etc. Another recent study investigated the factors that effect the adoption of virtual-
banking in China.

These studies conclude that although virtual-banking offers new frontiers of opportunities, there are
several critical

psychological and behavioral issues that need to be addressed in trust, security, reluctance to change
and a preference

for human interface. This study aims to fill the gap in the literature by focusing on the customer ’s
preferences for

virtual-banking in China. Findings of this study will be useful for the banking sector in assessing the
impact of

information technology and in formulating appropriate strategies for building customers’ loyalty thereby
enabling

them to retain customers.

3. Research Methodology

3.1 Methodology

To determine the customer ’s preference for virtual-banking, a survey was conducted during the second
half of

year 2002. A survey instrument was designed to collect data. The instrument itself was a questionnaire
loosely based

on one previously developed and focused on a list of 27 factors. Respondents were asked to indicate
their preference

for each of the factors, which they considered as affecting the adoption of virtual-banking. Demographic
variables like

the age, monthly income, and level of educ ation were sought from the potential respondents to test if
there are any

significant differences between the Internet and non-Internet users. Retail users of banking services in
China

participated in the study. The survey instrument was administered through the medium of Internet. The
sample was

drawn from customers at random in two cities Xi’an and Guangzhou. A total of 300 useable responses
were obtained.

3.2 Analysis and Discussion

To investigate if there are any demographic variables that influence the usage of virtual-banking,
demographic

variables were compared with the virtual-banking and non virtual-banking users. The underlying reason
for such an

analysis is the belief that the younger generation are more computer savvy and thereby are more likely
to adopt

virtual-banking; the higher the literacy rate, the more likely are the customers to adopt virtual-banking;
the more

affluent people are more likely to possess computer and thereby adopt virtual-banking. Based on the
selected

demographic characteristics, the two groups of banking users (virtual-banking users and conventional
banking users)

were compared by using t-tests.The Adoption of Virtual Banking in China: An Empirical Study

77

Table 1 Demographic Characteristics and Preference for Banking

Demographic characteristics E-banking users Conventional banking users Significance

Average age 28 years 36 years 0.325

Average monthly income RMB 3633 RMB 2224 0.006

Percentage of graduates and 86.2% 74.6% 0.892

undergraduates

Table 1 provides the results of the analyses. Only one of the demographic characteristics of monthly
income is

found to be significant. In terms of age, there is no significant difference on comparison between the
two groups of

users. The percentage of graduates and undergraduates in the two groups are about the same. There is
no significant

difference between the educational level of respondents and their preference for either convention or
virtual-banking.

Factor analysis is performed in order to examine and identify the underlying dimensions of the
constructs and

its relationships with each other. This analysis is also undertaken to determine whether the data could
be condensed

or summarized into smaller set of factors or dimensions. The factor analysis results in seven factors,
which are

appropriately named in line with the factors considered to affect the adoption of virtual-banking and
presented

together with the factor loading. Table 2 provides an overview of the findings. From an analysis of Table
2, the

pertinent factors which seem to affect the adoption of Internet bank are Internet accessibility reluctance
to change,

cost of computers and Internet access, trust in one’s bank, security concerns, convenience and ease of
use. It is,

however, interesting to note that awareness of virtual-banking products and services do not seem to
affect the

adoption of virtual-banking services. This may be due to the fact these respondents being Internet users
are probably

already quite aware of virtual-banking services. Overall, the seven factors account for about 78% of the
total
variance. Finally, each of the research questions is probed and a variance analysis is undertaken to
compare if any

variance exists for each of these factors between the virtual-banking and conventional banking users.

Table 2 Factors Affecting Adoption of Electronic Banking

Factors Rotated factor loading Percentage of variance

Accessibility

Internet access 0.809 13.35

Internet connection speed 0.73

Reluctance

Willingness to adopt technology enhancement 0.859 12.96

Level of awareness of current trends 0.782

Attitude towards change 0.617

Costs

Cost of computers 0.873

Cost of Internet connection 0.87 12.86

Trust in one’s bank

Banks reliability in correcting erogenous

Transactions 0.831 11.08

Trust in the bank to compensate for losses due to security 0.772

Infringements

Banks response rate to queries 0.618

Security concerns

Clear and understandable instruction 0.888 10.42

Security of Internet transaction 0.677

Length of Internet experience 0.608

Convenience

Time saving 0.911 9.90

Convenient way of doing bank transactions

Ease of use

Ease of performing e-banking transaction 0.739 8.38

Ease of navigation in the banks site 0.608 The Adoption of Virtual Banking in China: An
Empirical Study

78

4. Summary and Implications

Virtual banking so defined has been with us for some time. As ATM and Phone Banking are the most
commonly

used virtual banking services by the respondents, a more in-depth analysis of the usage pattern is
conducted. The same

could not be done for home banking and Internet banking because the sample size is too small and
hence not

representative enough. On average, 11 transactions are performed through ATM in a month by the 104
respondents who

are current users of ATM. Nearly half of the users use the ATM to process banking transactions 3-5 times
in a month.

This study shows that Internet accessibility, awareness, attitude towards change, computer and Internet
access

costs, trust in one’s bank, security concerns, ease of use and convenience are the major factors
affecting the adoption

of Internet bank services in China. Overall, the factors identified are in line with findings reported in
previous studies

mentioned earlier in the paper. Evidence also indicates that there are greater promotional efforts on the
part of banks

to create greater awareness of virtual-banking and its benefits are important for the success of e-
banking services

patronage. The level of such promotional activities at present is not surprising considering the fact that

virtual-banking is only still in the stage of infancy. The demographic differences between Internet bank
users and the

non-users are not very evident in this study, particularly with reference to age and educational
background. This may

be due to the fact that the sample respondents are basically already Internet users and thus they would
have some
similar characteristics. However, in view of the security concerns and the risk involved in e-banking
transactions, the

more affluent members of the sample appear to have a greater inclination towards virtual-banking.
Furthermore, the

fact that 20% of the sample respondents have already adopted e-banking service is encouraging and is
indicative of a

bright future for virtual-banking in China. However, there are certain limitations in this study. While this
exploratory

research has revealed some interesting results, readers should be cautious on some of its limitations.
Firstly, the

online survey method is a limitation to generalize the whole of the Malaysian context. Secondly, sample
size is

another limitation. Therefore, findings of this study are tentative and need further verification. Further
study with a

larger representative of all regions is suggested for a rigorous analysis.

Virtual banking as a technological innovation in banking has not been studied rigorously in the
perspective of

discussion. There are four key elements in the discussion of virtual banking process: the virtual banking,
channels

of communic ations, time and people in the social system. The issue of virtual banking adoption is a
complex one

as adopting a particular technology depends on many factors.

References:

1. Freeman A.. A Survey Technology in Finance, The Economist, October 26, 1996: 3-26

2. Gandy T.. Banking in E-space, The Banker, December 1995, Vol.145: 74-75

3. Shaoyi Liao, Yuanpu Shao, Huaiqing Wang, Ada Chen. The Adoption of Virtual Banking: An Empirical
Study, International

Journal of Information Management, 1999, Vol.19: 63-74

4. Tan H.. Banking on the Internet: Hype or Reality?, Banking World Hong Kong, November, 1996: 26-27

5. Task Team in Bank of China. Total Investigation on Business Competition of Foreign-owned Banks in
China, International

Financial Newspaper, 2003: 8

6. Wills D.. Banking on the Internet, Banking World Hong Kong, April 1996: 22-23